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[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Rules and Regulations]
[Pages 106315-106320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-30267]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 10020]
RIN 1545-BI22

Reissuance of State or Local Bonds

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that address when 
tax-exempt bonds are treated as retired for certain Federal income tax 
purposes. The final regulations are necessary to unify and to clarify 
existing guidance on this subject. The final regulations affect State 
and local governments that issue tax-exempt bonds.

DATES: 
    Effective date: These regulations are effective on December 30, 
2024.
    Applicability date: For dates of applicability, see Sec.  1.150-
3(f).

FOR FURTHER INFORMATION CONTACT: Zoran Stojanovic, (202) 317-6980 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

    This document contains final regulations that amend the Income Tax 
Regulations (26 CFR part 1) by adding final regulations under section 
150 and amending the regulations under section 1001 of the Internal 
Revenue Code (Code) to provide rules for determining when tax-exempt 
bonds are treated as retired for purposes of sections 103 and 141 
through 150 of the Code (final regulations).
    These final regulations are promulgated under the express 
delegation of authority in section 7805(a) of the Code, which 
authorizes the Secretary of the Treasury or her delegate to ``prescribe 
all needful rules and regulations for the enforcement of [the Code], 
including all rules and regulations as may be necessary by reason of 
any alteration of law in relation to internal revenue.''

Background

    On December 31, 2018, a notice of proposed rulemaking (REG-141739-
08) regarding retirement of tax-exempt bonds was published in the 
Federal Register (83 FR 67701) (proposed regulations). No public 
hearing was requested or held. Five public comments responding to the 
proposed regulations were received and are available at https://www.regulations.gov or upon request. After careful consideration of all 
the written comments, the proposed regulations are adopted as amended 
by this Treasury decision in response to such comments as described in 
the Summary of Comments and Explanation of Revisions.

1. Overview

    In general, under section 103, interest received by the holders of 
certain bonds issued by State and local governments is exempt from 
Federal income tax. To qualify for the tax exemption, a bond issued by 
a State or local government must satisfy various eligibility 
requirements under sections 141 through 150 at the time of issuance of 
the bond. If the issuer and holder agree after issuance to modify the 
terms of a tax-exempt bond significantly, the original bond may be 
treated as having been retired and exchanged for a newly issued, 
modified bond. Similarly, if the issuer or its agent acquires and 
resells the bond, the bond may be treated as having been extinguished 
upon acquisition and replaced upon resale with a newly issued bond.
    The term ``reissuance'' commonly refers to the effect of a 
transaction in which a new bond is deemed to be issued in place of an 
old bond as a result of retirement of the old bond pursuant to such an 
exchange or extinguishment. In the case of a reissuance, the reissued 
bond must be retested for qualification under sections 103 and 141 
through 150. The reissuance of an issue of tax-exempt bonds may result 
in various negative consequences to the issuer, such as changes in 
yield for purposes of the arbitrage investment yield restrictions under 
section 148(a), acceleration of arbitrage rebate payment obligations 
under section 148(f), and change-in-law risk.

2. Tender Option Bonds

    Tender option bonds and variable rate demand bonds (collectively, 
tender option bonds) have special features that present reissuance 
questions. Specifically, tender option bonds have original terms that 
provide for a tender option interest rate mode, as described in this 
paragraph. Issuers of tax-exempt bonds often preauthorize several 
different interest rate modes in the bond documents and retain an 
option to switch interest rate modes under parameters set forth in the 
bond documents. During a tender option mode, tender option bonds have 
short-term interest rates that are reset periodically at various short-
term intervals (typically, every seven days) based on the current 
market rate necessary to remarket the bonds at par. In connection with 
each resetting of the interest rate, the holder of a tender option bond 
has a right or requirement to tender the bond back to the issuer or its 
agent for purchase at par. Tender option bonds generally are structured 
with these short-term features supported by put options to enable the 
bonds to be eligible for purchase by tax-exempt money market funds 
pursuant to 17 CFR 270.2a-7 (Rule 2a-7 under the Investment Company Act 
of 1940).
    Tender option bonds also may have interest rate mode conversion 
options that permit the issuer or conduit borrower to change the 
interest rate mode on the bonds from a tender option mode to another 
short-term interest rate mode or to a fixed interest rate to maturity. 
At the time of a conversion to another interest rate mode, the holder 
of a tender option bond typically has the right or requirement to 
tender the bond for purchase at par.
    Tender option bonds generally have third-party liquidity facilities 
from banks or other liquidity providers to ensure that there is 
sufficient cash to repurchase the bonds upon a holder's tender, and 
they also commonly have credit enhancement from bond insurers or other 
third-party guarantors. Upon a holder's exercise of its tender rights 
in connection with either a resetting of the interest rate during a 
tender option mode or a conversion to another interest rate mode, a 
remarketing agent or a liquidity provider typically will acquire the 
bonds subject to the tender and resell the bonds either to the same 
bondholders or to others willing to purchase such bonds.

3. Existing Guidance

    To address reissuance questions related to tax-exempt bonds, on 
December 27, 1988, the Department of the Treasury (Treasury Department) 
and the IRS published Notice 88-130, 1988-2 CB 543, which provides 
rules for determining when a tax-exempt bond is retired for purposes of 
sections 103 and 141 through 150. Notice 88-130 provides in part that a 
tax-exempt bond is retired when there is a change to the terms of the 
bond that results in a disposition of the bond for purposes of section 
1001. In addition, Notice 88-130 provides special rules for retirement 
of certain tender option bonds that meet a definition of the term 
``qualified tender bond.''

[[Page 106316]]

    On June 26, 1996, the Treasury Department and the IRS published 
final regulations under Sec.  1.1001-3 of the Income Tax Regulations 
(1996 final regulations) in the Federal Register (61 FR 32926). The 
1996 final regulations provide rules for determining whether a 
modification of the terms of a debt instrument, including a tax-exempt 
bond, results in an exchange for purposes of section 1001. In 
recognition of a need to coordinate the interaction of the prior 
guidance in Notice 88-130 with the 1996 final regulations for 
particular tax-exempt bond purposes, the Treasury Department and the 
IRS stated their intention to issue regulations under section 150 on 
this subject in the preamble of the 1996 final regulations. See 61 FR 
32930.
    On April 14, 2008, the Treasury Department and the IRS published 
Notice 2008-41, 2008-1 CB 742. Like Notice 88-130, Notice 2008-41 
provides rules for determining when a tax-exempt bond is retired for 
purposes of sections 103 and 141 through 150 and includes special rules 
for qualified tender bonds. While the retirement standards provided in 
these two notices are similar, Notice 2008-41 was intended to 
coordinate the retirement standards for tax-exempt bond purposes with 
the 1996 final regulations on modifications of debt instruments under 
Sec.  1.1001-3 and to be more administrable than Notice 88-130. In 
order to preserve flexibility and to limit potential unintended 
consequences during the 2008 financial crisis, Notice 2008-41 permitted 
issuers to apply either notice. Generally, under Notice 2008-41, a tax-
exempt bond is retired when a significant modification to the terms of 
the bond occurs under Sec.  1.1001-3, the bond is acquired by or on 
behalf of its issuer, or the bond is otherwise redeemed or retired. The 
notice clarifies that, for purposes of these retirement standards, the 
purchase of a tax-exempt bond by a third-party guarantor or third-party 
liquidity facility provider pursuant to the terms of the guarantee or 
liquidity facility is not treated as a purchase or other acquisition by 
or on behalf of a governmental issuer. Although these general rules 
apply to a qualified tender bond, Notice 2008-41 also provides that 
certain features of qualified tender bonds will not result in a 
retirement. In Notice 2008-41, the Treasury Department and the IRS 
reiterated their intention to provide guidance on the retirement of 
tax-exempt bonds in regulations under section 150.
    The proposed regulations provide rules for determining when tax-
exempt bonds are treated as retired for purposes of sections 103 and 
141 through 150. The proposed regulations also amend Sec.  1.1001-
3(a)(2) of the 1996 final regulations to conform that section to the 
special rules in the proposed regulations for retirement of qualified 
tender bonds.

Summary of Comments and Explanation of Revisions

    After consideration of the public comments, the Treasury Department 
and the IRS adopt the proposed regulations as amended by this Treasury 
decision. This section of the preamble discusses the public comments 
and the revisions made in the final regulations in response to those 
comments.

1. General Rules for Retirement of a Tax-Exempt Bond

    The proposed regulations generally provide standards for 
determining when a tax-exempt bond is retired for purposes of sections 
103 and 141 through 150, including certain special rules for 
determining when qualified tender bonds are retired.
    One comment suggested expanding the scope of the final regulations 
to cover taxable tax-advantaged bonds, such as direct pay build America 
bonds and tax credit bonds, because some of those bonds were also 
issued as tender option bonds that would benefit from the special rules 
for qualified tender bonds. The authorizations for these taxable tax-
advantaged bonds, however, have been very limited in both time and 
amount, and very few of these bonds have been issued as tender option 
bonds. Furthermore, section 13404 of Public Law 115-97, 131 Stat. 2054, 
2138 (December 22, 2017), commonly referred to as the Tax Cuts and Jobs 
Act, repealed the existing authority in the Code for taxable tax-
advantaged bonds. Because no taxable tax-advantaged bonds currently may 
be issued and very few historically have been issued as tender option 
bonds, the Treasury Department and the IRS have determined that 
expanding the scope of the final regulations to include those bonds 
lacks sufficient justification. Accordingly, the final regulations do 
not adopt this comment.
    The proposed regulations generally provide that a tax-exempt bond 
is retired if a significant modification to the terms of the bond 
occurs under Sec.  1.1001-3, the issuer or an agent acting on its 
behalf acquires the bond in a manner that liquidates or extinguishes 
the bondholder's investment in the bond, or the bond is otherwise 
redeemed (for example, redeemed at maturity).
    The final regulations make one technical change to the second 
general rule regarding debt extinguishment to remove the reference to 
the ``bondholder's investment'' and thus to focus more clearly on the 
merger of interests and attendant extinguishment that occurs when an 
issuer acquires its own bond either directly or through an agent.
    Two comments recommended allowing an issuer to make an election to 
treat a tax-exempt bond as retired and reissued under the final 
regulations. These comments noted that it is sometimes unclear whether 
a transaction results in the retirement and reissuance of a tax-exempt 
bond. The comments described several specific situations in which such 
an election could address this uncertainty. The Treasury Department and 
the IRS recognize that such an election could reasonably reduce the 
burden on issuers in certain specific situations. However, the Treasury 
Department and the IRS have concerns that an unrestricted right to 
elect retirement and reissuance of tax-exempt bonds could result in 
unintended consequences. In response to this comment and to provide 
flexibility to address this issue in appropriate, tailored 
circumstances, the final regulations authorize the Commissioner to 
publish guidance in the Internal Revenue Bulletin that allows issuers 
to elect to treat tax-exempt bonds as retired and reissued in specific 
circumstances for purposes of sections 103 and 141 through 150.

2. Exceptions to Retirement of a Tax-Exempt Bond

    The proposed regulations provide three exceptions to the operation 
of the general rules that limit retirements of tax-exempt bonds. Two of 
these exceptions prevent the special features of tender option bonds 
from resulting in a retirement. A third exception applies to all tax-
exempt bonds.
A. Definition of Qualified Tender Bond
    The first two exceptions in the proposed regulations apply to 
qualified tender bonds, which are defined to cover tender option bonds 
that meet certain requirements. Specifically, a qualified tender bond 
is subject to certain limitations on interest rate, timing of interest 
payments, and maturity. A qualified tender bond must also include a 
qualified tender right. The proposed regulations generally define a 
qualified tender right as a right or obligation of the holder of a bond 
to tender the bond for purchase by the issuer, its agent, or another 
party at a purchase price equal to par plus any

[[Page 106317]]

accrued interest. Under the proposed regulations, a qualified tender 
right must also require the issuer or its remarketing agent to redeem 
the bond or to use reasonable best efforts to resell the bond within 
the 90 days of the tender at a purchase price equal to par plus any 
accrued interest.
    Four comments urged the Treasury Department and the IRS to amend 
the definition of a qualified tender right in the final regulations to 
allow a bond to be resold at a premium or discount price relative to 
the par amount of the bond (rather than just at a price equal to par as 
under the proposed regulations) when the qualified tender right is 
exercised in connection with a conversion of the interest rate mode to 
a fixed rate for the remaining term of the bond. The comments noted 
that, when a long-term fixed rate bond is originally issued at par, a 
sustained upward trend in interest rates can result in the bond having 
market discount as it is resold in the secondary market. If that market 
discount exceeds the permitted de minimis amount, the discount will be 
taxed as ordinary income to the holder. Premium included in the sale 
price of a long-term fixed rate tax-exempt bond serves as a buffer 
against market discount as interest rates rise over time. Accordingly, 
qualified tender bonds resold at a premium upon conversion of the 
interest rate mode on the bonds to a fixed rate to maturity generally 
have greater market demand and a lower yield than they would have if 
resold at par. The comments also noted that, even when an issue of 
fixed rate tax-exempt bonds is resold at an aggregate net premium 
price, certain bonds within the issue may be resold at a discount. The 
comments further noted that Notice 2008-41 permitted qualified tender 
bonds to be resold at a premium or a discount upon conversion of the 
interest rate mode to a fixed rate to maturity and treated the premium 
received by the issuer upon resale of the bonds as additional sale 
proceeds for purposes of the arbitrage investment restrictions under 
section 148. The final regulations adopt this comment.
    One comment pointed out a technical discrepancy in the proposed 
regulations under which a bond may be purchased pursuant to a qualified 
tender right by the issuer, the issuer's agent, or another party, 
whereas the bond must be resold under the terms of a qualified tender 
right by the issuer or a remarketing agent. The comment recommended 
that the final regulations clarify this technical issue in the 
definition of a qualified tender right so that the parties that may 
purchase the tendered bond (that is, the issuer, the issuer's agent, or 
another party) are also permitted to resell the bond. The comment 
advised against use of the term ``remarketing agent'' on the grounds 
that the party charged with reselling the bond may not be an agent of 
the issuer and the resale may be a private placement rather than a 
remarketing. The final regulations adopt this comment.
B. Exceptions to Retirement of a Qualified Tender Bond
    A qualified tender bond has two features that could result in 
retirement of the bond under the general rules for retirement in the 
proposed regulations. First, the existence or exercise of a qualified 
tender right in connection with an alteration under the terms of the 
bond could cause the alteration to be a modification under Sec.  
1.1001-3 and, if significant, that modification would result in 
retirement of the qualified tender bond under Sec.  1.150-3(b)(1) of 
the proposed regulations. For example, when accompanied by a tender 
right, an exercise of the issuer's option to change the interest rate 
or the interest rate mode under the terms of the bond could be a 
modification under the rule in Sec.  1.1001-3(c)(2)(iii) for 
alterations that result from the exercise of an option because the 
holder's resulting right to put the bond to the issuer or its agent 
under the qualified tender right upon the interest rate conversion 
could cause the issuer's option to fail to qualify as a unilateral 
option under Sec.  1.1001-3(c)(3)(i). Similarly, an issuer may be 
uncertain as to whether the periodic change in interest rate that 
occurs pursuant to the terms of a bond operating in a tender option 
mode could be a modification under Sec.  1.1001-3 when accompanied by a 
tender right. To address these circumstances, the proposed regulations 
provide a special exception that avoids retirement by disregarding a 
qualified tender right for purposes of applying Sec.  1.1001-3 to 
determine whether an alteration of a qualified tender bond constitutes 
a significant modification under Sec.  1.1001-3 that results in 
retirement of the bond.
    One comment requested that the final regulations clarify whether 
this exception applies to a qualified tender right arising in 
connection with any alteration of the terms of the bond or only to a 
qualified tender right arising in connection with a change in interest 
rate or interest rate mode. The scope of the analogous provisions in 
Notices 88-130 and 2008-41 was limited to circumstances covering 
changes in the interest rate or interest rate mode only. The Treasury 
Department and the IRS intended for this special rule to be similarly 
limited in scope. In response to the comment, the final regulations 
clarify that the special rule for disregarding a qualified tender right 
in applying Sec.  1.1001-3 to a qualified tender bond applies only for 
the purpose of determining whether an alteration of the interest rate 
or interest rate mode pursuant to the terms of a qualified tender bond 
results in a retirement. The determination of whether any other 
alteration to the terms of a qualified tender bond, such as a change in 
maturity or collateral, results in a retirement under Sec.  1.150-
3(b)(1)(i) is made under the general rules in Sec.  1.1001-3 without 
the benefit of the special exception in Sec.  1.150-3(c)(1), even if 
the alteration occurs contemporaneously with a change in interest rate 
or interest rate mode on the bond.
    One comment recommended that the final regulations include several 
additional exceptions to the general rule under Sec.  1.150-3(b)(1) 
that a bond is retired for purposes of sections 103 and 141 through 150 
when a significant modification occurs under Sec.  1.1001-3. 
Specifically, this comment requested that the final regulations include 
a rule from Notice 2008-41 that a modification that changes the 
collateral or credit enhancement on a nonrecourse tax-exempt bond is 
significant only if the change results in a change in payment 
expectations under Sec.  1.1001-3(e)(4)(vi). This special rule involved 
an accommodation for circumstances in the 2008 financial crisis. This 
comment also requested that the final regulations retain the exception 
in Notice 88-130 for qualified corrective changes. This exception from 
1988 preceded the significant modification standard under Sec.  1.1001-
3, which was finalized in the 1996 final regulations. In most 
circumstances, these qualified corrective changes would not be 
significant modifications under Sec.  1.1001-3. Further, a significant 
purpose of the final regulations is to improve administrability in a 
complex area of law by integrating the rules for retirement of a tax-
exempt bond as closely as possible with the existing rules under Sec.  
1.1001-3. Accordingly, the final regulations do not adopt these 
comments.
    The second feature of a qualified tender bond that could result in 
retirement of the bond under the general rules for retirement in the 
proposed regulations is the feature under which an issuer or its agent 
may acquire the bond upon the holder's exercise of the qualified tender 
right. The general rules for retirement treat an acquisition of a bond 
by an issuer or an issuer's agent in a manner that extinguishes the 
bond as

[[Page 106318]]

a retirement of the bond. To address this circumstance, the proposed 
regulations provide an exception under which the acquisition of a 
qualified tender bond pursuant to the exercise of a qualified tender 
right will not result in retirement, provided that neither the issuer 
nor its agent holds the bond for longer than 90 days. One comment 
recommended expanding this special rule to cover all tax-exempt bonds 
rather than just qualified tender bonds. This exception is limited to 
qualified tender bonds because the rate-setting mechanism on those 
bonds may require the issuer or its agent to purchase a tendered bond 
if a buyer for the bond cannot be found when the bond is tendered. The 
Treasury Department and the IRS have adopted this limited exception for 
the narrowly defined class of qualified tender bonds because the 
acquisition of those bonds occurs pursuant to the ordinary operation of 
the rate-setting mechanism on those bonds. In addition, qualified 
tender bonds represent a significant structured type of bonds in the 
tax-exempt bond market tailored to money market fund investors and the 
Treasury Department and the IRS have supported this structure with 
accommodating special rules consistently in all of the existing 
guidance in this area. Other tax-exempt bonds do not rely on this 
exception for the ordinary operation of their rate-setting mechanism. 
The Treasury Department and the IRS decline to expand this exception to 
allow issuers to hold their own bonds more generally because of 
concerns regarding the implications for the debt extinguishment 
principle. Accordingly, the final regulations do not adopt this 
comment.
    One comment recommended continuing a special rule from Notice 2008-
41 that modified the definition of program investment for purposes of 
arbitrage investment restrictions under Sec.  1.148-1(b). Ordinarily, 
this definition prohibits a conduit borrower of tax-exempt bond 
proceeds from purchasing the bonds that financed the conduit loan in an 
amount that is related to the conduit loan. Notice 2008-41 modified 
this rule so that a conduit borrower could purchase any auction rate 
bonds that financed the conduit loan, provided the conduit borrower 
purchased the bonds to facilitate liquidity under adverse market 
conditions. This special rule permitted conduit borrowers to buy those 
bonds to address extraordinary circumstances in the 2008 financial 
crisis and to increase liquidity at a time of market crisis involving 
the collapse of the auction rate bond market and downgrades of bond 
insurers. The Treasury Department and the IRS decline to extend this 
special rule beyond the conditions under which the rule was 
promulgated. Accordingly, the final regulations do not adopt this 
comment.
C. Additional Exceptions for All Tax-Exempt Bonds
    The proposed regulations also provide an exception to the general 
rules of retirement for all tax-exempt bonds. This exception, carried 
forward from Notice 2008-41, provides that acquisition of a tax-exempt 
bond by a guarantor or liquidity facility provider acting as the 
issuer's agent does not result in retirement of the bond if the 
acquisition is pursuant to the terms of the guarantee or liquidity 
facility and the guarantor or liquidity facility provider is not a 
related party (as defined in Sec.  1.150-1(b)) to the issuer. No public 
comments were received on this provision. The final regulations adopt 
this provision without change.
    The proposed regulations provide that a tax-exempt bond is retired 
for purposes of sections 103 and 141 through 150 when a significant 
modification occurs under Sec.  1.1001-3. Section 1.1001-3(e)(5)(i) 
generally provides that, subject to the special rule in Sec.  1.1001-
3(f)(7), a modification of a debt instrument that results in an 
instrument or property right that is not debt for Federal income tax 
purposes is a significant modification. Section 1.1001-3(f)(7)(ii)(A) 
generally provides that, in determining whether a modification of a 
debt instrument results in an instrument or property right that is not 
debt, any deterioration in the financial condition of the obligor 
between the issue date of the debt instrument and the date of the 
modification is not taken into account. One comment recommended that, 
when new bonds are issued and the proceeds are used to currently refund 
outstanding bonds, issuers be allowed to apply the credit deterioration 
rule in Sec.  1.1001-3(f)(7) to treat the new bonds as a continuation 
of the refunded bonds for purposes of sections 103 and 141 through 150. 
The Treasury Department and the IRS have concluded that there is not 
sufficient justification to expand the scope of the final regulations 
to include rules for new issuances of tax-exempt bonds. Accordingly, 
the final regulations do not adopt this comment.

3. Effect of Retirement of a Tax-Exempt Bond

    The proposed regulations prescribe certain consequences for a bond 
that is retired pursuant to a deemed exchange under Sec.  1.1001-3 or 
retired following the acquisition of the bond by the issuer or the 
issuer's agent. Upon a deemed exchange under Sec.  1.1001-3, the bond 
is treated as a new bond issued at the time of the significant 
modification as determined under Sec.  1.1001-3. Upon an issuer's 
acquisition of its own bond, absent any special rule, the bond is 
extinguished and retired. One comment recommended permitting an issuer 
that purchases its own tax-exempt bond to treat the resale of that bond 
as a refunding of the bond extinguished by the purchase. The comment 
suggested that the issuer be permitted to allocate the proceeds from 
the resale of the bond to the expenditure incurred in the purchase of 
the bond under rules similar to the rules for using proceeds of tax-
exempt bonds to ``reimburse'' previous expenditures under the 
reimbursement expenditure rules in Sec.  1.150-2. Section 1.150-
2(g)(1), however, specifically prohibits using bond proceeds to 
reimburse expenditures incurred in repayment of tax-exempt bonds. 
Modification of the reimbursement rules to encompass refundings of 
extinguished and retired bonds is beyond the scope of the final 
regulations. The final regulations do not adopt this comment.

4. Applicability Dates

    Under the proposed regulations, the final rules would apply to 
events and actions taken with respect to bonds that occur on or after 
the date that is 90 days after the date of publication of the final 
regulations in the Federal Register. The proposed regulations further 
state that issuers may apply the proposed regulations to events and 
actions taken with respect to bonds that occur before that date. One 
comment recommended applying the final regulations only to bonds issued 
after the applicability date of the final regulations. This comment 
noted that outstanding bonds are structured to avoid retirement under 
the existing guidance and potentially might not avoid retirement under 
the final regulations. The Treasury Department and the IRS are 
concerned that this approach would continue the application of the 
disparate existing guidance in this area for a substantial period of 
time for the entire current outstanding volume of tax-exempt bonds in 
the municipal bond market. The principal goals of the final regulations 
are to unify, clarify, and improve the administrability of the existing 
guidance on retirement of tax-exempt bonds. The Treasury Department and 
the IRS have determined that publishing the final regulations without 
also obsoleting

[[Page 106319]]

Notice 88-130 and Notice 2008-41 would undermine the unifying and 
streamlining purposes of the final regulations. In addition, the final 
regulations and Notice 2008-41 are similar and generally should produce 
similar results in most cases outside of special circumstances 
involving the 2008 financial crisis. Accordingly, the final regulations 
do not adopt this comment.
    However, to provide a longer transition period for outstanding tax-
exempt bonds, the final regulations provide a period of one year from 
the date the final regulations are published in the Federal Register 
during which issuers may continue to apply Notice 88-130 or Notice 
2008-41. As a result, the final regulations apply to events occurring 
and actions taken with respect to bonds on or after December 30, 2025, 
though an issuer may choose to apply the final regulations to events 
occurring and actions taken with respect to bonds on or after December 
30, 2024.

Effect on Other Documents

    Notice 88-130 and Notice 2008-41 are obsolete as of December 30, 
2025.

Special Analyses

I. Regulatory Planning and Review

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (RFA), it is hereby 
certified that these final regulations will not have a significant 
economic impact on a substantial number of small entities. The final 
regulations affect State and local governments that issue tax-exempt 
bonds. States are not considered small entities for purposes of the RFA 
but small governmental jurisdictions (jurisdictions with populations 
less than 50,000) are considered small entities. The Treasury 
Department and the IRS do not have data on how many small governmental 
jurisdictions may be affected by these regulations, but it may be a 
substantial number.
    Even if a substantial number of small entities are affected, the 
economic impact of these regulations will not be significant. These 
final regulations consolidate and clarify the existing guidance on 
retirement and reissuance of tax-exempt bonds published in Notices 88-
130 and 2008-41. Therefore, these final regulations will not create 
additional obligations for, or impose an economic impact on, a 
substantial number of small entities. Accordingly, a regulatory 
flexibility analysis is not required.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding this regulation was submitted to the Chief Counsel 
for the Office of Advocacy of the Small Business Administration for 
comment on its impact on small governmental jurisdictions and no 
comments were received.
III. Unfunded Mandates Reform Act
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. These regulations do not include any Federal mandate that 
may result in expenditures by State, local, or Tribal governments, or 
by the private sector in excess of that threshold.

IV. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. The final regulations do not have 
federalism implications and do not impose substantial direct compliance 
costs on State and local governments or preempt State law within the 
meaning of the Executive order.

V. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as not a major rule, as defined by 5 U.S.C. 804(2).

Statement of Availability of IRS Documents

    Any IRS Revenue Procedure, Revenue Ruling, Notice, or other 
guidance cited in this document is published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Drafting Information

    The principal author of these regulations is Zoran Stojanovic of 
the Office of Associate Chief Counsel (Financial Institutions and 
Products). However, other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

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Par. 2. Section 1.150-3 is added to read as follows:

Sec.  1.150-3  Retirement standards for state and local bonds.

    (a) General purpose and scope. This section provides rules to 
determine when a tax-exempt bond is retired solely for purposes of 
sections 103 and 141 through 150 of the Internal Revenue Code (Code).
    (b) Retirement of a tax-exempt bond--(1) General rules. Except as 
otherwise provided in paragraph (c) of this section, a tax-exempt bond 
is retired when:
    (i) A significant modification of the bond occurs under Sec.  
1.1001-3;
    (ii) The issuer or its agent acquires the bond in a manner that 
extinguishes the bond; or
    (iii) The bond is otherwise redeemed (for example, redeemed at 
maturity).
    (2) Elective retirement. In guidance published in the Internal 
Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(a) of this chapter), the 
Commissioner may set forth specific circumstances under which an issuer 
may elect to treat a tax-exempt bond as retired for purposes of 
sections 103 and 141 through 150 of the Code.
    (c) Exceptions to general rules for retirement of a tax-exempt 
bond--(1) Qualified tender right disregarded for certain purposes. In 
applying Sec.  1.1001-3 to a qualified tender bond for purposes of 
paragraph (b)(1)(i) of this section, both the existence and exercise of 
a qualified tender right are disregarded for purposes of determining 
whether an alteration of the interest rate

[[Page 106320]]

or interest rate mode that occurs pursuant to the terms of the bond is 
a modification. Thus, an issuer's exercise of an option to alter the 
interest rate or interest rate mode on a qualified tender bond 
generally is not a modification under Sec.  1.1001-3 because the 
alteration occurs by operation of the terms of the bond and the 
holder's resulting right to put the bond to the issuer or the issuer's 
agent pursuant to the disregarded qualified tender right does not 
prevent the issuer's option from qualifying as a unilateral option 
under Sec.  1.1001-3(c)(3) that would not give rise to a modification.
    (2) Acquisition pursuant to a qualified tender right. An 
acquisition of a qualified tender bond by the issuer or its agent does 
not result in the retirement of the bond under paragraph (b)(1)(ii) of 
this section if the acquisition is pursuant to the operation of a 
qualified tender right and neither the issuer nor its agent continues 
to hold the bond after the close of the 90-day period beginning on the 
date of the tender.
    (3) Acquisition of a tax-exempt bond by a guarantor or liquidity 
facility provider. An acquisition of a tax-exempt bond by a guarantor 
or liquidity facility provider acting on the issuer's behalf does not 
result in the retirement of the bond under paragraph (b)(1)(ii) of this 
section if the acquisition is pursuant to the terms of the guarantee or 
liquidity facility and the guarantor or liquidity facility provider is 
not a related party (as defined in Sec.  1.150-1(b)) to the issuer.
    (d) Effect of retirement. If a bond is retired pursuant to 
paragraph (b)(1)(i) of this section (that is, in a transaction treated 
as an exchange of the bond for a bond with modified terms), the bond is 
treated as a new bond issued at the time of the modification as 
determined under Sec.  1.1001-3. If the issuer or its agent resells a 
bond retired pursuant to paragraph (b)(1)(ii) of this section, the bond 
is treated as a new bond issued on the date of resale. The rules of 
Sec.  1.150-1(d) apply to determine if the new bond is part of a 
refunding issue.
    (e) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Issuer means the State or local governmental unit (as defined 
in Sec.  1.103-1) that actually issues the tax-exempt bond and any 
related party (as defined in Sec.  1.150-1(b)) to the actual issuer (as 
distinguished, for example, from a conduit borrower that is not a 
related party to the actual issuer).
    (2) Qualified tender bond means a tax-exempt bond that, pursuant to 
the terms of the bond, has all of the following features:
    (i) During each authorized interest rate mode, the bond bears 
interest at a fixed interest rate, a qualified floating rate under 
Sec.  1.1275-5(b), or an objective rate for a tax-exempt bond under 
Sec.  1.1275-5(c)(5);
    (ii) Interest on the bond is unconditionally payable (as defined in 
Sec.  1.1273-1(c)(1)(ii)) at periodic intervals of no more than one 
year;
    (iii) The bond has a stated maturity date that is not later than 40 
years after the issue date of the bond; and
    (iv) The bond includes a qualified tender right.
    (3) Qualified tender right means a right or obligation of a holder 
of a tax-exempt bond pursuant to the terms of the bond to tender the 
bond for purchase as described in this paragraph (e)(3). The purchaser 
under the tender may be the issuer, its agent, or another party. The 
tender right is available on at least one date before the stated 
maturity date. For each such tender, the purchase price of the bond is 
equal to par (plus any accrued interest). Following each such tender, 
the issuer, its agent, or another party either redeems the bond or uses 
reasonable best efforts to resell the bond within the 90-day period 
beginning on the date of the tender. Upon any such resale, the resale 
price of the bond is equal to the par amount of the bond (plus any 
accrued interest), except that, if the tender right is exercised in 
connection with a conversion of the interest rate mode on the bond to a 
fixed rate for the remaining term of the bond, the bond may be resold 
at any price, including a premium price above the par amount of the 
bond or a discount price below the par amount of the bond (plus any 
accrued interest). Any premium received by the issuer pursuant to such 
a resale is treated solely for purposes of the arbitrage investment 
restrictions under section 148 of the Code as additional sale proceeds 
of the bonds.
    (f) Applicability date--(1) General applicability. This section 
applies to events occurring and actions taken with respect to bonds on 
or after December 30, 2025.
    (2) Permissive applicability. An issuer may choose to apply this 
section to events occurring and actions taken with respect to bonds on 
or after December 30, 2024.

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Par. 3. Section 1.1001-3 is amended by revising paragraph (a)(2) to 
read as follows:

Sec.  1.10011.1001-3  Modifications of debt instruments.

    (a) * * *
    (2) Tax-exempt bonds. For special rules governing whether tax-
exempt bonds are retired for purposes of sections 103 and 141 through 
150 of the Internal Revenue Code, see Sec.  1.150-3.
* * * * *

Douglas W. O'Donnell,
Deputy Commissioner.
    Approved: December 8, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-30267 Filed 12-27-24; 8:45 am]
BILLING CODE 4830-01-P
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